World Bank, IMF at odds over hot money flows

Washington, October 7, 2010

Emerging economies should consider steps to contain fund flows that could cause currency rallies and asset bubbles, the World Bank chief was quoted as saying, but the International Monetary Fund called such actions "undesirable."

The contrasting views over capital controls come amid rising tension between emerging and developed economies over exchange rates, which is expected to be a hot topic at Group of Seven and International Monetary Fund meeting starting on Friday.

Western leaders are worried efforts by emerging economies to weaken their currencies could derail the fragile economic recovery. Officials from developing markets say ultra-low interest rates in rich countries are fuelling massive fund flows into their markets, pushing up their currencies and inflating prices of stocks, property and other assets.

World Bank president Robert Zoellick said emerging nations should consider various measures to control short-term capital flows, according to the Nikkei newspaper.

But IMF deputy managing director, Naoyuki Shinohara, said it was natural and welcome for money to shift into economies with strong growth and policymakers should not try to curb such flows or use intervention to defend specific currency targets.

'When there are occasionally volatile moves in the market, intervention cannot be ruled out,' he told Reuters in an interview in Washington on Wednesday.

'But it's totally undesirable for a country to intervene consistently to keep currencies at a certain level.'

Shinohara, who was Japan's currency tsar before assuming the IMF post, warned Tokyo faced a losing battle trying to go against the tide and weaken the yen as monetary conditions in the United States and Europe are expected to remain easy.

'This is not something that Japan can control. If Japan tries to adjust this, it will distort markets,' Shinohara said, adding that Tokyo should instead focus on structural reforms and monetary easing to beat deflation.

Zoellick, however, was careful not to judge Japan and other nations which have stepped into markets to weaken their currencies.

'I'm neither endorsing them nor criticising them,' Zoellick said told the Nikkei in an interview published on Thursday on its English website.

Japan sold the yen in the currency market for the first time in six years last month, The currency drifted back up, hitting a 15-year high against the dollar on Wednesday.

Prime Minister Naoto Kan reiterated that sharp currency moves cannot be ignored and the government would act decisively as needed.

Signs of a 'currency war' are growing as major industrial nations want to keep their exchange rates weak to help their struggling exporters while emerging economies such as Brazil and South Korea are taking or planning steps to curb capital inflows. – Reuters